This description relates to valuation in a financial market, and more particularly to assessing the risks associated with and valuation of various business entities, assets, transactions, and financial instruments in the marketplace.
In a marketplace, stakeholders, such as banks, insurers, private and institutional investors, regulators, or governments often make financial or business decisions based on assessed risks or valuations of an investment. For example, a stakeholder may invest to obtain a regular (or fixed) return by lending money to a borrower or purchasing a financial instrument, where the borrower or financial instrument pays interest once a month. Financially, the stakeholder has been issued a fixed-income security. Typical risks associated with such a fixed-income security may include 1) the borrower's inability to pay the principal back or inability to pay the promised interest, or 2) the inability of the assets underlying a financial instrument to generate sufficient cash flow to pay the principal back or inability to pay the promised interest. The stakeholder would want to assess such risks before investing and periodically determine whether the value or risk has changed from the time of the initial valuation.
Generally, financial intermediaries and rating agencies assess risks associated with complex financial instruments, and as a consequence, rating agencies, assign a rating to such financial instruments. For example, rating agencies typically use various, proprietary and unpublished algorithms to rate securities for pricing, measuring the value, assessing volatility, and accessing risks associated with the securities or other financial instruments. Different agencies may rate the same financial instrument differently and provide the stakeholders with inconsistent conclusions regarding the security of that financial instrument.